IFRS 15 Revenue Flashcards
(8 cards)
Five steps of revenue - Overview, IIDAR
5 step approach to recognising revenue e.g. sale of goods, provision of services or construction contracts.
- Identify the contract
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations
- Recognise revenue when performance obligation is satisfied
Identify the contract
The economic reality of the transaction must be a sale
Both parties must approve
Right and payment terms identified
commercial substance
Probability of getting paid
Determine who is principal or agent
Identify the performance obligations
Identify separate performance obligation
1. Performance obligations are separately identifiable within the
contract e.g. phone contract - phone, data, calls
2. This is also the same when you give free products based on
customer achieving a set objective. buy 2 get 1 free e.g. revenue and deferred revenue when customer has not yet achieved objective
IFRS 15 Revenue from Contracts with Customers states that goods or services which are promised to a customer are distinct if both of the following criteria are met:
– the customer can benefit from the good or service either on its own or together with other resources, and
– the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.
Determine the transaction price -
variable consideration
receipt of cash one year in arrears of revenue recognition
receipt of cash one year before revenue recognition
impact of credit risk
sale at return basis,
BNPL
Transaction price is the amount expected to be received
With variable consideration an estimate should be made of the expected value or the most likely amount. include if highly probable that it would not reverse.
Time value of money may be relevant if cash is received one year or more after revenue is recognised. financial asset of receivable is recognised and finance income is recognised as discount is unwound
If cash is received one year or more before revenue is recognised, a liability of deferred revenue is recognised and interest is accrued at borrowing rate. when performance obligation is recognised, liability is derecognised as income.
Credit risk does not affect measurement of transaction price but provision for bad debt should be recognised
If there is a high probability of returns, the revenue amount should reflect this, the difference in cash received should be posted as a liability (deferred income) - sale at return basis
BNPL
In substance seller is providing finance , and must take time value o money. Revenue is amount after taking into account time value of money (will be lower) difference is posted to inter
Deferred income
receive cash now but fulfil performance later, debit cash and credit deferred income and recognise income as you fulfil performance obligation
Allocate the transaction price to the performance obligations
allocate based on individual prices.
The overall transaction price is allocated between distinct elements in proportion to standalone prices of each element.
***The first four steps occur
Recognise revenue when performance obligation is satisfied
when is performance obligation satisfied?
what is control?
Factors indicating transfer of control at A POINT IN TIME
Factors indicating transfer of control OVER TIME
This is to do with timing, when should we recognise allocated revenue.
This is when the entity satisfies the performance obligation, Seller satisfies obligation by transferring control of promised god or service to the customer at a point in time or over time
The default is at a point in time where -
1. the right to be paid is earned
2. customer has legal title
3. seller has transferred physical possession
It can also be recognised over time, this is in one of three circumstances
1. customer is simultaneously receives and consumes benefit - providing a service
2. If entity’s performance creates or enhances an asset the customer controls as it is being created or enhanced - extension to a property
3. Entity’s performance does not create an asset with an alternative use and entity has enforceable right to payment for performance completed to date e.g. bespoke construction of an asset
How to measure progress over time
it can done via output or input methods
output methods
work certified as a proportion of transaction price over time e.g. surveyor says 60% of work has been done
Input methods
costs incurred as a proportion of total costs * revenue
Contract costs
The direct incremental costs of fulfilling the contract are recognised as an asset, costs of winning the contract that are unique and specific to winning the contract. e.g. success fees paid to the agents
This is expensed if amortisation period is 12 months or less
They wont be incurred unless the contract was won
Asset is then amortised in a way that is consistent with pattern of transfer of goods and services.
This is expensed if amortisation period is 12 months or less
